Down now, cement demand likely to pick up in Q3FY18
City: 
Regional disparities show up in sales across India

In some parts of the country cement prices have been heading southward, in some parts, they have stayed firm. As far as sales are concerned, there has been a mixed trend from different pockets as well. Although the projected cement demand has been revised downward for several reasons, cement players and market analysts expect the demand to rebound from Q3 FY18.

Significantly, as for financial performances, most cement companies reported an increase in revenues in Q1 FY2018 on a year-on-year (YoY) basis. This, according to Icra, was mostly driven by an increase in the sales volumes and net sales realisations. While the profitability margins of most cement companies have been under pressure on account of rising costs during the period, an increase in realisations have supported the margins to a large extent. Healthy cement realisations aided in either stability or growth in operating profitability for most of the north-based and east-based companies during Q1 FY2018 on a YoY basis. However, south-based companies were unable to completely pass on the rising costs which resulted in a decline in their operating profitability, despite the price hike in April 2017.

Earlier, in the first half of September 2017, cement prices had been marginally lower by 1 per cent, month on month. This, according to cement players, was driven by price weakness in the northern region due to seasonally weak demand. Then in the country, as a whole, average cement prices for 2QFY18 had dropped 5 per cent QoQ, which was led by the northern and southern regions. This can be attributed to the fact that exit prices of 1QFY18 had been weaker than average cement prices for the quarter. Average prices for the northern and southern regions in 2QFY18 are expected to be lower by 5 per cent and 6 per cent QoQ, respectively.

Market analysts pointed out that cement demand growth is expected to be around 3.5 per cent to 4 per cent during FY2018, a downward revision as against its earlier estimate of 5 per cent, owing to the delay in the revival of cement demand during H1 FY2018. Although cement demand is expected to be muted in Q2 FY2018 on account of the monsoons and GST implementation issues, ICRA expects it to rebound from Q3 FY2018 onwards.

Adverse impact

“The demand in Q1 FY2018 was adversely impacted due to sand shortage (in a few southern and northern states), implementation of the Real Estate Regulatory Authority (RERA) and slowdown in construction activity (in the western region) and drought and weak housing activity (in a few southern states). Although demand for cement is expected to be muted in Q2 FY2018 on account of the monsoon and GST implementation issues, we expect the demand to rebound from Q3 FY2018. The demand growth is likely to be driven by a pick-up in the housing segment – primarily affordable and rural housing, and infrastructure segment – mostly road and irrigation projects,” said Sabyasachi Majumdar, senior vice president and group head, ICRA Ratings.

This weak demand, according to leading cement industry players, had caused a drop in cement prices in July– August 2017 in most markets. On a pan-India basis, prices declined in the range of 4 per cent to 8 per cent in August, when compared to June 2017. The revival in cement demand from Q3 FY2018 is likely to result in an increase in cement prices, according to cement industry leaders.

A part of the price decline, which took place, can also be attributed to reduction in prices on account of GST benefits in select states, and to that extent realisations may not see an equivalent quantum of decline. Sector analysts further pointed out that the shift in institutional sales from ex-factory to cum-freight also distorts headline realisations for select companies, as the benefit of the same will be offset through higher freight costs. Whether that will actually happen remains to be seen.

“In 2QFY18, we expect pan-India players to report volume growth of 5-8 per cent YoY, with ACC benefiting from an expanded capacity base. Regional names too are expected to show a modest volume growth of 6-8 per cent except Shree Cement and India Cement which would likely report double-digit volume growth of 15 per cent and 10 per cent, respectively. Fuel cost is likely to continue the uptrend, even as pet-coke prices show some moderation,” said an Equity Bulls report.

It added, “Cement companies will continue to bear the brunt of higher pet-coke prices that increased 13 per cent QoQ to $96/tonne in 1QFY18. Although prices have moderated since (6 per cent qoq in 2QFY18), the same will not reflect in earnings due to the lagged effect of price variation (one to two months of inventory). Freight cost will likely moderate owing to the waiver of busy-season surcharge by the railways as well as potential input credit on taxes under the new GST regime.”

Kotak Institutional Equities Research echoed similar sentiments. When it comes to earnings potential of cement companies, Kotak Institutional Equities Research felt that a modest price increase and healthy volume growth, although dented by higher production costs, will likely underpin Q2 earnings. More importantly, the first quarter under GST could yield surprises on realisations as well as benefits from input cost credits.

Inventories

Besides, the cement industry is likely to register 6 per cent y-o-y growth in Q2 FY18. Potential re-stocking of inventories may have helped volumes even as volume trends in the recent past have borne the brunt of GST rollout, demonetisation, and introduction of RERA, the report said.

Majumdar of Icra, on his part, said that the rise or upward correction in cement prices would be critical from the point of view of the profitability of the cement companies. “Further, given our expectations of higher power and fuel (increase in coal and pet coke prices) and freight costs (increase in diesel prices) during FY2018, the increase in cement prices remain critical from the profitability perspective. Lumpy capacity additions in the recent past have led to an increase in debt levels and some deterioration in credit metrics, although they still remain at comfortable levels for most of the larger players. In addition, rising costs continue to put pressure on the profitability margins and debt metrics of the cement companies,” said Majumdar.

Columnist: 
Ritwik Mukherjee